Covered Call Options as a Safety Strategy

Understanding covered call options in the world of options trading is a great strategy that traders use to

get the benefits of stock ownership while at the same time earn a premium writing calls. In an out-of-

the-money covered call the investor sells calls against a holding of underlying shares. Additionally,

covered call options allow the investor to receive dividends and hold voting rights with a company. Just

as in most cases, there is risk involved in this venture because if the underlying security falls, the

investor loses money but does retain the premiums that were received for writing the calls. The risk can

be reduced by creating collars to protect the investor. You need to be bullish toward the stock in order

to use this strategy. It is essential that you fully understand all of the risks and benefits before you begin

to use this strategy. This approach is not for every investor, but if you are optimistic toward an

underlying stock, covered call options can be a very effective strategy to use.

Because of this, many investors consider covered call options to be a safe strategy in today’s

unpredictable market. To give an example of a covered call option, the seller of the call options owns

the stock shares. For example, imagine an investor owned 1000 shares of a particular stock worth

$100,000. If he sells 10 option contracts for $10,000, this would cover a decrease in the stock up to

$10,000. Thus, if the stock declines, it would have to decline by more than $10,000 for the investor to

lose money. In this case, the loss isn't prevented, but it is reduced. Thus, this is where the strategy can

be considered to be safe, as it covers part of an individual’s investment. The risks lie in the scenario

where the investor has to sell the stock under market price or buy it back higher. Thus, covered call

options are not a means to completely protect an investor, but they are a way to offer some security

against loss.

Even with this risk and even during the financial downturn, people are profiting with stocks and options.

There are many strategies to use including but covered call options strikes as the most widely used by

beginners and experienced investors alike. This can relate to most stocks including the biggest ones

including industrial, resources, health, technology and financial stocks. With covered call options you are

required to write call options. However the great element is that you actually own the stock which you

are underwriting to an option holder. You will most likely choose this option if you have an optimistic

outlook that the stock market will be in an upward trend for some time. It is possibly a great stock to

derive an income from the stock as well. By writing covered call options, you can reduce the risk of

investing. There are many online brokers to choose from which charge extremely low fees of brokerage.

Generally the more trades you undertake the less brokerage you will end up paying. Undertake some

research to see if covered call options is for you.

Information Source: BornToSell